Economic Update - March 2019

Authored by: Home Mortgage Alliance

As we have been discussing this year, rates are going to be pretty steady with slight increase trends to the end of the year. Giving our buyers and refinance borrowers more incentive to make a move.

LONG ONE… but good info

So why have rates drifted back down? The slow economy in Europe is helping, and this country isn't surging. In this country, the Fed's decision to leave the Fed Fund Target range unchanged between 2.25 percent to 2.5 percent was widely expected by the financial markets. It was, however, the Fed's comments on economic conditions that were slightly more cautious and reaffirming of its wait and see policy stance that caused Treasury yields to fall. While neither the statement nor the comments after confirmed the Fed believes it has reached a neutral policy rate, the updated "dot plot" [] shows that most members think there will be no further rate increase this year, however, a small number of members still feel one hike is likely. The financial markets were only pricing in a slight probability of a rate hike by the end of the year prior to the statement and following its release the view shifted to a 60% likelihood of a rate decrease in 2019. While economic conditions have certainly moderated during the quarter, the data remains positive albeit at a slower pace.

This morning (March 25, 2019)…….

Recent economic data reaffirmed growth is moderating in the U.S., giving more reason for the Fed to have exercised patience at the FOMC meeting regarding policy changes. The Producer Price Index eked out a 0.1 percent gain in February and is up a modest 1.9 percent over the last 12 months. Even though energy prices spiked, they were offset by declines in transportation and warehousing services. Consumer prices also managed a small increase during the month with drops in utility, vehicle and medical care commodities offset rising energy costs. Several weak retail categories lead to a lackluster 0.2 percent gain in retail sales during January. Sales were impacted by the government shutdown which also weighed on consumer confidence. One bright note: small business optimism finally reversed its recent losing streak with a small gain in February as the government shutdown ended.

Turning to bond markets, rates have bounced this morning but last week's U.S. rate rally continued into Monday, the 10-year dropping to 2.42% as the market did not receive any U.S. economic data, but key-exporter Germany's ifo Business Climate Index for March showed a continued deterioration of the manufacturing sector. Headline news revolved around the Mueller Report on Russian collusion with the Trump administration. Attorney General William Barr briefed Congress on the findings of special counsel Robert Mueller's investigation, and news outlets were able to report the investigation "did not find that any U.S. person or Trump campaign official or associate conspired or knowingly coordinated" with Russia. In China, First Vice Premier Han Zheng said China will continue cutting import taxes to create a first-rate environment for foreign businesses and Finance Minister Liu Kun said that the government will speed up bond sales to boost domestic demand. Finally, U.K. Prime Minister Teresa May's said she would not bring a vote to Parliament unless it would win support, increasing odds of a no deal Brexit.

Today, things pick back up with a heavy economic calendar. We have already had February housing starts (-8.7%, weak) and building permits (-1.6%, weak) and the March Philadelphia Fed Nonmanufacturing Business Outlook Survey. Redbook Chain Store Sales for the week ending March 23 are next up at 8:55 am and are followed five minutes later by January home prices at 9:00am. March consumer confidence and the Richmond Fed Manufacturing and Services Indices are at 10:00 am followed by the Dallas Fed Texas Services Index for March. Also of interest to the MBS market, the Senate Banking Committee will conduct a hearing, "Chairman's Housing Reform Outline: Part 1" beginning at 10am. We begin today with agency MBS worse a few ticks and the 10-year yielding 2.43 percent.